The Chinese stock meltdown and NZ

5:34 pm on 9 July 2015

The dramatic rise and fall of the Chinese stock market does not augur well in the short term for New Zealand exports to the world's second largest economy according to local economists.

A man watches a screen board at a stocks market in Huaibei, east China's Anhui Province, July 6, 2015.

A man watches a screen board at a stocks market in Huaibei in east China's Anhui Province. Photo: AFP

New Zealanders woke today to news of a downward spiral in the Chinese stock market. The Shanghai Composite index fell 5.9 percent, taking the value of shares to 32 percent below their peak in June.

But lying beneath that headline number the story is about a stock market which has seen a large correction over a short period of time, and the dramatic plummet, comes off a dramatic high, and in reality the stock market is back to similar levels as to where it was in March this year.

The drop follows moves by Chinese officials to calm the volatility in the market, including stopping investors with more than a 5 percent stake in stocks selling their shares in the next six months.

Economists said that the correction should be seen as being distinct from China's wider economy.

A BNZ senior economist, Craig Ebert, said the fall was big, but it was important to understand what was behind it.

"The chinese equity market has been on a ballistic move really since the start of the year. Between around March and mid-June the Chinese stock market essentially doubled in value and part of that was because Chinese officials were cheer-leading the market as part of its reform packages."

"I think it just got so much a head of steam it [Chinese officials] just had to step in and say enough is enough and put in some policy measures to nip it in the bud."

He said the fact that the Chinese stock market essentially doubled in the first few months of this year, while the Chinese economy was demonstrably slowing down "tells you that there's clearly some disengagement of the equity market moves to what's going on in the general economy."

A Westpac senior economist, Michael Gordon, said what has happened with the Chinese sharemarket was not a reflection of the country's underlying economy.

He said there have been dramatic movements in the market in both directions over the last year, and there has been an explosion in what is called margin borrowing, effectively buying shares using debt.

"That caused a run up in the sharemarket of around about 150 percent in the space of a year, but then as the market started to turn what happened is that these loans that were used to buy shares they started to be called in, that forced people to sell shares, which pushed the prices down, which forced more loans to be called in and so on."

He said this pattern has meant there was a substantial spiral up and a substantial spiral downwards in the market.

Mr Gordon said the borrowing to buy shares had been heavily concentrated towards mum and dad or retail investors in the last year, the level of which far exceeds what goes on in the US market for example.

"It was at it's peak I think around about 8 or 9 percent of turnover was done through these margin investors, whereas if you look at the US it's probably steady around about 3 percent, so it's been quite extensive in terms of how much it's been responsible for the run-up we had in the previous year and the collapse that we've seen in the last few weeks."

Mr Gordon said this was likely to have some knock-on effect to Chinese consumer confidence, and a lot of what New Zealand sells to China was more oriented towards the consumer, like these mum and dad investors, whereas Australian products are targeted towards the industrial sector.

He said the most immediate thing on the horizon was what it would do to commodity prices.

"We haven't really had a sense of what it will do to the things that New Zealand sells just yet, but for instance if you look at iron ore, which is a big Australian export, it's had a very sharp drop in prices.

"That's coming through in some quite big hits to actively traded commodities, it's not clear what it might do for something like dairy prices, but you can't think it will be a particularly positive thing in the near-term."

New Zealand's exports to China are largely agricultural and products aimed at the final consumption side, dairy products, lamb, beef, fruit, wine, and forestry products.

Mr Gordon said if there was a knock in consumer confidence that was not a good indication for things like dairy prices in the near-term and it was not clear what the longer term implications of that will be.

He said in China consumer spending had grown faster than the wider economy.

"I think we're likely to see an impact in the near-term most likely to come through our main export prices, it's likely to see a knock to the confidence of Chinese consumers, and we're seeing a lot of panic selling coming through in other commodities as people are trying to raise cash, so that doesn't really augur that well for the prices of the commodites that we sell into China in the near-term."


New Zealand Trade and Enterprise put the value of exports to China for the 2014 calendar year at $11.8 billion, $9.98 billion of that are export goods, as oppose to services.

Exporters think they should be able to weather China's stock-market storm in the short-term.

The New Zealand China Trade Association aims to promote and strengthen trade relations between this country and China.

Its chair Martin Thomson said the fall was not likely to harm New Zealand sales for now.

"It needn't necessarily have an immediate or direct effect on trade with China, the only consequence that may happen is that it does have en economic effect on the Chinese economy generally which might dampen demand for New Zealand products."

Mr Thomson cautions that long-term loss of confidence in China could harm sales to the country.

Concerned Chinese investors look at prices of shares (green for price falling) at a stock brokerage house in Nantong city, east China's Jiangsu province

Concerned Chinese investors look at prices of shares (green for price falling) at a stock brokerage house in Nantong city in east China's Jiangsu province. Photo: AFP

China's long-term reforms

Economist Craig Ebert says the wider story for New Zealand was about China's economic growth and reforms that Chinese officials were making to the country's economy, steering it away from industrial investment, and driving economic growth through the consumer sector.

"Some of these reforms that the Chinese officials are keen on are to actually boost the consumer sector in China while trying to tone down some of the exuberance in the resources sector that feed into investment and infrastructure.

"So in that sense we might be more insulated if we're selling consumer products, particularly food products into China, there's still fundamental demand and growth and the trajectory there looks certainly more encouraging over the next couple of years then it does for resources such as Australia's iron ore story and metals and minerals."

He said the key for New Zealand was really where the Chinese consumer sector goes, "and we think that's much less vulnerable to some of the other sectors in China."

Mr Ebert said China was still developing as an economy and that would involve the consumer sector playing a bigger role, "the growth that it's relied on for a good number of years has been around its industrial base, almost to the expense of the consumer sector."

"The China story for New Zealand is a still a very good one over the medium term. It's just we need to cope with some bumpiness in the Chinese economy as it tries to transition to more sustainable rates of growth."